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Family business in Mexico

Ilya Adler is Principal and Vice-President for Latin American
Operations for Kochman Mavrelis Associates, and Professor of Business
at Alliant International University.

Mexican family businesses enjoyed public protection, subsidies and the trappings of wealth until the 1980s when globalisation and free trade brought an end to their dominant position within the economy

In Francis Fukuyama's book, Trust, he labels some cultures as having a 'low trust' factor. The 'trust' factor means that people engage in business activities with others whom they can trust, and this trust is often limited to a small group of family mem­­bers and/or very intimate friends. Need­­less to say, in these cultures, family bus­iness tends to be the prevailing form of capitalism.

In Mexico, most business organisations, large and/or small, are family-run units. To say that Mexico falls under the 'low trust' category of cultures is an understatement. Some would even go so far as to say this is a country of 'no trust' when it comes to business associations. Thus, the requirements of trust over competency are as acute in Mexico as anywhere in the world.

The fact that a culture or a country has a 'low trust' environment in business comes from many historical roots, and in the case of Mexico, these roots are varied and complex. But certainly its history of the Spanish conquest – which established a hierarchical system in terms of race and ethnicity where those of pure Spanish blood held the highest position – and the fact that the judicial system was never able to control or offset corruption after independence from Spain in the early 19th century, made Mexico a country where business flourished largely because of outlaw practices. This required owners of business to abide by loyalty to the group rather than to legal procedures. Claiming that Mexico should be, above all, a country of law is simply a political statement that little resembles its reality. Mexico is not a country ruled by rules or laws, but rather by people. And it is people who make or break rules. This is believed by those who have power or those who wish they did. It is simply part of the national ethos.

Family business in the formation of capitalism
There is no doubt that the first 200 hundred years of capitalist economics in Mexico were based in family businesses. This is not unlike many other countries. However, what is different in the Mexican case is that it survived for so long. Until the late 1980s, when former President Carlos Salinas de Gortari allowed free trade and globalisation to become part of Mexico's economic new reality, the country had been economically run by family business organisations enjoying public protection and/or outright subsidies.  Until the Mexican Revolution, and especially in the reign of Porfirio Diaz, the dictator preceding the Mexican Revolution, family businesses in Mexico blossomed as never before. Porfirio Diaz was the moderniser of late 19th century and early 20th century Mexico. He relied heavily on immigrant groups to develop Mexico's own business class, meant to be socially and culturally distant from the United States. Remember, Mexico had a long and sad history with its neighbour to the north, against which it lost a war in the mid-19th century that cost the country more than 50% of its territory.

While this is simply 'history' to many people elsewhere (and often ignored, of course), in Mexico it is part of what people feel about the USA. It is a love-hate relationship that, on the one hand, respects and admires the USA's pragmatic approach to business, and on the other hand, despises it for making the Mexican ethos feel as part of a backward society. This hate-love relationship prevails even today, even after NAFTA (North American Free Trade Agreement), and perhaps will, for a very long time to come.

Immigrants as entrepreneurs
Like many countries in the Americas, Mexico was a destination for many immigrant groups from Europe and countries that were part of the declining Ottoman Empire, especially Christians from Syria and Lebanon. The main immigrant groups that came and stayed in Mexico were the Spanish, Americans, French, Jewish, Lebanese and German. Other immigrant groups also came but at lesser numbers and with less impact on the development of the entrepeneurship class.

Without a doubt, the Spanish immigration was the largest and the one that practically defined the style of what became the main traits of family businesses in Mexico: authoritarian, hierarchical and blind obedience to the patrón (boss or head of the business). Additionally, Spanish immigrants were practicing Catholics, and church affiliation was often considered an important factor in defining who was 'in' or 'out' of the rich and high society of Mexico. Indeed, non-Catholic immigrant groups, such as the Jews, were possibly equally wealthy, but were never considered part of the 'high society' and generally were invisible in public life.

To these immigrant groups, who were usually escaping wars and persecution, the goal in coming to the New World was to hacer la América, which literally means to 'make the America', but largely denotes 'to make a fortune'. Mexico was a fertile land for people with ambition and the ability to link a rural society to modernity.

Import Substitution
During the Porfiriato, Mexico became modernised, but this modernisation was the result of importing technology and finished goods, and exporting raw materials. Foreign interests were dominant, including the exploitation of oil and mineral resources. The spread of the new wealth was limited, and therefore the general population saw few benefits deriving from modernisation. It is under these conditions that the Mexican Revolution took place, an event that shaped the country for the rest of the century. After years of chaos, the country finally calmed down in the late 1920s, and a new political and economic order was established. The state would now play a central role in determining economic policies, including ownership of oil and other critical industries.

While wealthy families were now limited in their political actions, they were favoured by a new fervour for economic independence. This economic independence was interpreted as freeing Mexico from its foreign economic forces, and national development was now understood as developing national industries and commercial institutions, limiting the actions of those who came from other countries. Over the years this mentality, widely shared in other countries of Latin America, became known as the Import Substitution programme.

The main idea behind this economic philosophy was that national businesses needed to be protected, for a while at least, from foreign competition, until they had a chance to mature and be ready to face foreign competition. The period of Import Substitution was the golden years for family businesses in Mexico. From World War II until the late 1960s, family fortunes grew exponentially, and roughly 300 families owned the bulk of the means of production. Since the state received most of its resources from oil revenues, the tax burdens on these leading families were limited.

Over time, the success of these family businesses in Mexico became increasingly dependent on facing little or no competition, and in getting special subsidies from the state. Thus, a business class became 'lazy' since profits were almost guaranteed, regardless of how well (or poorly) they ran their ships. In addition, as children and grandchildren took over these family businesses, they often found themselves totally unqualified to run them. As a result, many wild transactions were made, literally ruining many of those businesses. Finally, family feuds among children and grandchildren were (and still are) not uncommon, creating tensions that resulted in strong divisions, further affecting these business operations.

The Import Substitution programme had, in fact, failed. For too long, consumers had been getting low quality products and services at expensive prices. The state could no longer survive on its oil resources, and in the 1970s the economic system started to show recurrent crises, until it finally burst in the 1980s. Mexico had to change, and needed above all, new financial resources, new technology and fresh ideas. It was forced into opening its system to the world, and with it came the end of the dominant position held by wealthy families. Many of these family businesses were eventually bought out by large multinational companies. This occurred with all the leading banks, some telecommunication companies, many manufacturing and commercial enterprises, to name just a few.

Survival of the fittest
Although the richest families no longer have the once mighty presence they had in the Mexican economy, it would be wrong to say that family businesses in Mexico no longer play an important role. There are some family businesses that survived past errors and have adapted to the new globalised business environment. Perhaps the two most noted family-owned businesspersons are Lorenzo Zambrano, the president of cement giant Cemex; and Carlos Slim, the owner of Mexico's telephone company Telmex, as well as various other companies in Mexico owned by Grupo Carso, which he and his sons run.

Lorenzo Zambrano runs one of the most profitable cement operations in the world, with holding interests throughout the world. He is also on the board of directors of various companies, and was recently named a board member of IBM. Zambrano's success lies in placing professional standards above nepotistic considerations, and in using IT technology to develop the best run cement operation in the world. He is a firm supporter of quality higher education, and has put a good portion of his fortune and time into creating top-class universities in Mexico. He embodies what Peter Drucker has said for years about how family business can endure: by becoming professional, to the extent that family members want to run the business, and by becoming educated and trained to run a business.

Carlos Slim, on the other hand, comes from a different background and has used different tactics. Much like Bill Gates, Carlos Slim came out of nowhere. A man with Lebanese roots, in a very short period of time he has become the richest man in Mexico. He is listed year after year in the Fortune 500 list, and his wealth is estimated to be around US$20 billion. However, his fortune is due to a mixture of political and business skills. His political skills allowed him to be the winner of the Telmex privatisation, and his business acumen is best seen by his knack for buying failing businesses and turning them around. He is also extremely skilled in working with local and national political leaders, which has made it possible to increase his wealth significantly.  Rumours are always abundant that much of his fortune is derived directly from 'political deals', but they have never gone beyond speculation. Internationally, he has had some success in Latin America. However, his various attempts at running business operations in the US have, so far, resulted in losses and, in some cases, legal problems. Unlike Lorenzo Zambrano, Carlos Slim's fortune seems to be culturally based on more traditional skills. Nevertheless, he is the dominant business figure in Mexico.

To survive, have no ego
The future of family businesses is uncertain at this point. Only those that take a professional management approach and have egos that do not interfere with rational business decisions are likely to survive. (One of my informants, a member of the wealthy class himself, told me that egos make rich people purchase companies at fantasy prices, and egos drive them to destroy each other.) How many will be able to do so is not clear, but given the number of family business that have failed, we should expect an increasingly diminishing role of the family business as the leading entrepreneurial sector of society.

This does not mean that wealthy families have ceased to exist. On the contrary, the number of people living the 'good life' is abundant in Mexico. A few months ago a book named Ricas y Famosas (Wealthy and Famous Women by Daniela Rosell) became a controversial and popular book in which a series of women were photographed in lavish settings that showed truly the lifestyle of the rich and famous in Mexico. Many people found it in poor taste that in a country where millions still live below the poverty line, these rich women not only seem oblivious to the reality of the rest of the country, but even brag publicly about their wealth. Still, with all its criticism, the book is found in most of the homes of these wealthy families. So family businesses may have shrunk, but not necessarily the number of rich people.

The other family businesses
Of course, many other family businesses exist throughout Mexico, namely the small-to-medium sized businesses that employ most of the population. From humble grocery stores built in the garage of a house to small manufacturers and other service providers, much of the future of the family business lies in making these small ventures into efficient and productive entities. These businesses tend to serve the larger corporations, and to the extent that they can become productive, their relative well-being will be materialised. Another area of hope is greater cooperation among small businesses, but in a country in which low trust prevails, this is not likely to happen any time soon. The fact is that the family business in Mexico will have to coexist with the large multinational corporations. It is a New World for Mexico, the results of which are yet to be evident.

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